Hot
Growth CompaniesThese diverse outfits
prove you don't have to be a dot-com to be a dynamo

Flouting
convention comes naturally to Tom Kartsotis. The 40-year-old Texan's resume includes
a stint as a professional ticket scalper. In 1984, Kartsotis was scouring Asia
looking to start an import-export business when he visited a Hong Kong factory
that was churning out lookalikes of $150 European wristwatches for just $35. He
cut a deal with the owner and rushed back to Richardson, Tex., to launch Fossil
Inc. (FOSL)
as a purveyor of moderately priced fashion watches, a growing niche then dominated
by Swatch Group Ltd. and Guess? Inc. (GES)

Kartsotis struggled initially with designs that were similar to the faux-marble
faces and jumbo dials of his bigger rivals. But he soon struck gold with a line
of 1950s Americana theme watches that tapped into consumers' appetite for nostalgia.
To further differentiate its watches, Fossil packages them in colorful retro tin
boxes that have become collectors' items. And it has expanded its distinctive
brand into leather wallets, handbags, and other accessories. Coming soon: a push
into apparel.

Fossil's innovative designs and ability to respond quickly to fickle consumer
tastes--it rolls out 200 new watch designs each year--have generated sizzling
growth. Over the past three years, it has clocked average annual earnings and
sales growth of 58% and 27%, respectively. With earnings over the past four quarters
hitting $52 million on sales of $419 million, Fossil zoomed to No. 41 on Business
Week's list of the 100 fastest-growing small companies.

HAND OVER FIST. As Fossil's performance proves, you don't have to be a
dot-com to be dynamic. Most of the companies on our Hot Growth list have little
to do with e-commerce. What they have is business savvy, single-minded focus,
and a willingness to think outside the box. It's a potent combo that has produced
something their more glamorous Internet brethren still lack: profits. Our Hot
Growth companies are making money hand over fist.

These diminutive dynamos have even outperformed industry giants, generating average
annual sales and earnings growth of 51% and 92%, respectively, over the past three
years. That compares with 8.7% and 9.6%, on average, for companies in the Standard
& Poor's Industrial Index. And these tiny operators have squeezed sky-high returns
out of their capital: over the same period an average 22%, while the S&P averaged
just 9.2%.

How did companies make the list? We looked at those with sales between $25 million
and $500 million. The floor for market capitalization was $25 million.

The 100 companies on our list are a diverse bunch. Many winners rode the high-tech
boom, of course. But companies that cater to consumers with money to burn were
flush, too. The No. 1 company is Direct Focus Inc. (DFXI)
(page 184), which sells the Bowflex exercise bench, a favorite of baby boomer
fitness fanatics. Buff tough guys on parade proved to be money-making entertainment
for World Wrestling Federation Entertainment (WWFE)
(No. 3, page 182). And there are plenty who hit pay dirt in more pedestrian fields.
U.S. Concrete Inc. (RMIX)
(No. 9) and Trex Co. (TWP)
(No. 43), a maker of vinyl decking material, are racking up big gains, thanks
in part to the surge in construction and home improvement projects.

With standouts in virtually every sector and geographic region, the Hot Growth
roster reflects the overall vibrancy of the U.S. economy--and the extent to which
entrepreneurialism now permeates American business. ''There are lots of terrific,
profitable companies outside the tech world that are benefiting from the strength
of the economy,'' says Tucker M. Walsh, portfolio manager of State Street Research
Emerging Growth Fund.

About half of the Hot Growth 100 provide computer, telecommunications, or biotech
products and services. Many of these supply the picks and shovels to bigger companies
that are mining the high-tech Gold Rush. That has been the road to riches for
Albany Molecular Research Inc. (AMRI)
(No. 4, page 192), which does chemistry outsourcing for drugmakers. Similarly,
Zomax Inc. (ZOMX)
(No. 31) provides marketing, graphic design, and other services to software publishers
and computer makers. Diamond Technology Partners Inc. (DTPI)
(No. 38, page 188) shines by teaching e-biz strategy to executives at Ford, Goldman
Sachs, and other corporate giants. ''With big companies downsizing and outsourcing,
there are huge opportunities for small companies to do well,'' says John W. Ballen,
portfolio manager of MFS Emerging Growth Fund.

Similarly, the handful of telecom companies that made the Hot Growth list make
specialized equipment for the new broadband era of high-speed transmission. Advanced
Fibre Communications Inc. (AFC)
(No. 19) sells a digital device that provides phone companies with a low-cost
method of delivering voice, video, and data to users. Earnings rocketed an average
of 181% in the last three years at the company, whose customers include Sprint
and France Telecom. Ditech Communications Corp. (DITC)
(No. 55) makes equipment that eliminates echoes that can occur on satellite and
mobile-phone calls. And Plantronics Inc. (PLT)
(No. 33) is the world's leading maker of the lightweight telephone headsets that
are becoming ubiquitous in offices around the world.

Several of the more low-tech winners are nimble high-fashion businesses that,
like Fossil, have their finger on the consumer pulse. Last year's No. 6 company,
bebe stores (BEBE),
a retailer that caters to stylish young women, is No. 7 this year. Two trendy
women's shoe and accessories companies also scored: Steven Madden Ltd. (SHOO)
(No. 62) and Kenneth Cole Productions Inc. (KCP)
(No. 79), last year's No. 61. Companies that target Generation Y shoppers also
hit it big. Among them were Pacific Sunwear California Inc. (PSUN)
(No. 54), a casual clothing chain, and Hot Topic Inc. (No. 74), a purveyor of
music-themed apparel.

After years of getting snubbed on Wall Street, small growth companies are finally
winning some respect. While the Standard & Poor's 500-stock index was up just
6.3% in the year ended May 5, the Russell 2000, a barometer for small-company
stocks, climbed 18.1%, the first time it outperformed the S&P since 1993. Why
the rebound? Market pros say large-cap stocks had simply gotten too pricey. In
recent years, economic jitters in Asia, Russia, and Latin America sent investors
running for cover to a narrow range of big-cap stocks. After a series of earnings
disappointments, ''people finally came to realize that earnings growth for larger
companies could not justify valuations,'' says Ballen of MFS Emerging Growth Fund.

That opened an opportunity for small stocks. Ballen and others think small caps
will continue to advance because many are still relatively cheap. According to
Merrill Lynch Small Cap Research, measured on a price-to-cash-flow basis, small
stocks are selling at a 45% discount to large stocks. Investors also are banking
on stronger revenue and earnings projections for smaller companies, which tend
to be prime pockets of innovation.

Small-cap fever, especially for dot-coms, set the market for initial public offerings
ablaze in 1999. Companies raised a record $69 billion in 543 IPOs in 1999, according
to Thomson Financial Securities Data. Our roster of Hot Growth companies was no
exception. IPOs were abundant on this year's list--21 of the 100 companies went
public in the U.S. after January, 1999.

But entrepreneurs will have a tough time cashing in on their success this year.
After a robust start--companies raised $39.6 billion in 188 IPOs through May 12--the
IPO bubble burst in the spring after a series of high-profile Internet ventures
faltered. The average gain this year from the date of IPO through mid-May was
a puny 7%, vs. last year's 194% average jump in post-offering prices from the
issue date through the end of 1999. The flood of new stock issues has shrunk to
a trickle.

And there are other worries. In 1999, a record $46.6 billion was raised by 409
venture capital funds, up 67% from '98, and the money poured in during the first
quarter of 2000, too. But some venture players say the white-hot market is starting
to cool. And small caps will take a big hit if the Federal Reserve continues to
jack up interest rates. Even without these factors, many highfliers will not be
able to manage their torrid growth and will flame out.

But small businesses that have differentiated products and services that can command
premium prices will probably ride out the uncertainty in the financial markets.
Many are sitting on cash piles that can tide them over and fuel growth. ''If you're
making money and generating cash, you don't have to worry,'' says Walsh of State
Street. And if the economy keeps barreling along, there will be plenty of survivors
in every business sector. As our Hot Growth 100 proves, you don't have to have
a dot-com after your name to make it into the big leagues.